In the past, it was not infrequent to see on the market issuers established in European Member States acting as pass-through vehicles of Italian unlisted companies providing guarantees to their subsidiaries for the issue of notes. Unlisted Italian companies would, in fact, need to apply a withholding on payments of interest if they would accede directly the markets as issuers of notes.
Law Decree No 98 of July 6 2011, converted into Law No 111 of July 15 2011 concerning "urgent measures for financial stabilisation", introduced an additional paragraph 8-bis to Article 26-quarter of Presidential Decree No 600 of September 29 1973, so as to tax such transactions.
The new provision provides for the application of an interest withholding tax levied at 5% on interest paid under inter-company loans by Italian resident companies in favour of EU-related companies where the EU-related companies use the interest received to pay interest connected with bond issues traded in a qualifying regulated market within the EU or EEA and guaranteed by the Italian companies or other qualifying group member.
The relevant deeds of guarantee would be, in this case, subject to a 0.25% registration tax.
The 5% withholding tax applies under the conditions that:
- the interest payment is made to the EU-related company complying with the requirements provided by Article 26-quarter; and
- the EU-related company receiving the interest payment is not the beneficial owner of the interest.
Article 26-quarter provides, under certain circumstances, for exemption at source on interest, in compliance with the rules of Directive EC/2003/49 concerning the tax regime applicable to interest payments among EU-related companies (the Interest Directive). Among the other prerequisites, the EU Directive requires that the recipient must qualify as the beneficial owner of the interest received under inter-company loans.
Absent such prerequisite, Italian domestic withholding tax would apply (normally at a rate higher than 5%).
The Decree being immediately effective as of July 6 2011 (the date of its publication in the Official Gazette) a transitional regime has been also provided for interest connected to loans outstanding at the time of entry into force of the Decree.
Interest payments that have already been made and are not subject to exemption under the EU Directive may benefit from the new tax regime to the extent that the withholding tax is paid to the Italian Revenue by November 30 2011 together with the related interest for delayed payment. In this case, the withholding tax would be due at a rate of 6%. This amount includes the registration tax on the relevant deeds of guarantee.
The intention of the legislature seems, indeed, to be to introduce a reduced taxation regime to pass-through vehicles of unlisted companies compared to standard withholding taxes applicable to direct issues of unlisted companies and to inter-company loans between EU-related companies lacking the requirements of a beneficial owner.